The Dallas Police & Fire Pension (DPFP), which covers nearly 10,000 police and firefighters, is on the verge of collapse as its board and the City of Dallas struggle to pitch benefit cuts to save the plan from complete failure. According the the National Real Estate Investor, DPFP was once applauded for it’s “diverse investment portfolio” but turns out it may have all been a fraud as the pension’s former real estate investment manager, CDK Realy Advisors, was raided by the FBI in April 2016 and the fund was subsequently forced to mark down their entire real estate book by 32%. Guess it’s pretty easy to generate good returns if you manage a book of illiquid assets that can be marked at your “discretion”.

To provide a little background, per the Dallas Morning News, Richard Tettamant served as the DPFP’s administrator for a couple of decades right up until he was forced out in June 2014. Starting in 2005, Tettamant oversaw a plan to “diversify” the pension into “hard assets” and away from the “risky” stock market…because there’s no risk if you don’t have to mark your book every day. By the time the “diversification” was complete, Tettamant had invested half of the DPFP’s assets in, effectively, the housing bubble. Investments included a $200mm luxury apartment building in Dallas, luxury Hawaiian homes, a tract of undeveloped land in the Arizona desert, Uruguayan timber, the American Idol production company and a resort in Napa.

Despite huge exposure to bubbly 2005/2006 vintage real estate investments, DPFP assets “performed” remarkably well throughout the “great recession.” But as it turns out, Tettamant’s “performance” was only as good as the illiquidity of his investments. We guess returns are easier to come by when you invest your whole book in illiquid, private assets and have “discretion” over how they’re valued.

In 2015, after Tettamant’s ouster, $600mm of DPFP real estate assets were transferred to new managers away from the fund’s prior real estate manager, CDK Realty Advisors. Turns out the new managers were not “comfortable” with CDK’s asset valuations and the mark downs started. According to the Dallas Morning News, one such questionable real estate investment involved a piece of undeveloped land in the Arizona desert near Tucson which was purchased for $27mm in 2006 and subsequently sold in 2014 for $7.5mm.

Then the plot thickened when, in April 2016, according the Dallas Morning News, FBI raided the offices of the pension’s former investment manager, CDK Realty Advisors. There has been little disclosure on the reason for the FBI raid but one could speculate that it might have something to do with all the markdowns the pension was forced to take in 2015 on its real estate book. At it’s peak, CDK managed $750mm if assets for the DPFP.

The sudden implosion of the fund left active-duty Dallas police and firemen wondering whether that pension check they had been counting on to fund their retirement was about disappear for good. All of which sparked a mass exodus of Dallas police and firefighters eager to lock in their payout rates before they were slashed by the DPFP board (see: Dallas Police Resignations Soar As “Insolvent” Pension System Implodes).

Now, despite the passage of a plan designed to ‘save’ the pension by the Texas legislature back in May, a record 72 officers decided to quit the force in July. Apparently they were not convinced that the legislature’s plan is going to work.

Meanwhile, the steady outflow of officers for over a year now is leading to what many in Dallas are calling a public safety crisis. Per the local Dallas CBS affiliate:

Dallas Police Association President Mike Mata and others sounded the alarm months ago: Now, by the end of this month, Mata says 72 Dallas Police officers will leave: 70 percent of them are retiring and the other 30 percent are going to make more money at other departments. “We’re losing some of our most experienced detectives: The investigator you want to come out and solve that homicide, that you need to come out and solve that sexual assault.”

Adam McGough, chairman of the Dallas city council’s public safety committee, is also expressing concern. “That’s the first of this number I heard of it. Anytime we have large numbers of officers leaving, it’s concerning.”

Mata says, “We’re at a critical state and we’re not solving the problems that are going to help correct this. That’s why I’m a little disappointed in the city manager’s budget.”

Apparently these officers can’t wrap their heads around how an incremental $40 million contribution from the City of Dallas will solve their pension’s $3 billion funding shortfall…they aren’t the only ones.